Scraping the Barrel
Oil has been holding up in the extraordinarily choppy and thin trading conditions as investors mixed supply cuts and a demand rebound against a grim economic outlook from the Fed Chief Jerome Powell.
More broadly, oil prices appear to be attempting to trough out a range as unabashedly bullish sentiment over the short term might be giving way to the time mismatch between the market pricing versus the real economy demand.
Still, crude oil prices are up sharply across the last 48 hours, albeit off the highs as some understandable profit-taking kicked in. A clear trend to the re-opening of large developed economies is supportive, but crude prices could remain range-bound as investors scrutinize the re-opening news flow – particularly as they pertain to a resurgence of the virus, and especially in more populated areas where driving trends have picked up.
For today in Asia, bullish market ambition could give way to oil market investors combustible nature as they grow more skittish about a potential coronavirus vaccine that sparked a big risk rally yesterday. Indeed, there was a relatively muted reaction to the bullish draw reported in the API inventory report, likely weighted down by less favorable news on the vaccine front.
In general, oil prices continued to find support from a combination of positive macro data points in Asia. There’s been a notable increase in refined product demand in China and India so far in May and this suggests a more optimistic view on oil demand may be justified. This optimism also reflects the recent monthly updates from OPEC, the EIA and IEA, all of which acknowledge more rapid curtailment of non-OPEC production than was expected even a month ago.
There’s a growing chorus of Wall Street analysts suggesting the current oil surplus in Q2 will turn to a deficit in Q3. If the market deficit was triggered by demand alone, it would be very bullish and mean something special. However, given the massive waves of forced and agreed supply curtailment, as prices rise in anticipation of that breakeven, US shale and other global producers will either uncap the wellheads or ramp up production. So much of the heavy lifting will fall on consumer demand for all things oil to push prices higher.
But even at this stage of the price recovery it remains to be seen how much of the non-OPEC reduction will remain if oil prices continue to move higher and how good compliance within the OPEC+ group will be.
The near-term contango in pricing has compressed, likely providing good optics to OPEC+ producers as it offers a better price for their exports without allowing US producers an opportunity to hedge out longer-dated production at higher levels.
It appears that both supply and demand are rebalancing at a much quicker pace than expected, which is excellent news from the industry, the global economy and stock markets in general.
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Two-year yields have covered their prior six-month range in the last week alone – and whether or not this move is sustainable matters a lot